While most newbie telcos are struggling to survive, Unitech Wireless (under its brand Uninor) has figured out a way to flourish at the bottom of the market
The spat between Telenor of Norway and homegrown real estate developer Unitech—both partners in mobile telephony provider Unitech Wireless—is out in the open. Telenor, a 67.25 per cent shareholder, wants a right issue to fund the expansion, while Unitech thinks debt is the way ahead. It has also contested the Rs 600-crore valuation of Unitech Wireless by Telenor and BNP Paribas. This is way below the Rs 9,000-crore valuation of the company when Telenor entered in 2009. Telenor has said that telecom valuations have corrected sharply in the last couple of years. Unitech has countered that the company is worth Rs 11,000 to Rs 12,000 crore. Both partners have initiated arbitration proceedings.
The two are bickering perhaps because there’s good business here, the arrest of Unitech’s Sanjay Chandra (he was released recently) in the 2G scam notwithstanding. (However, the Central Bureau of Investigation has said that it came across no money trail or quid pro quo from Unitech and Chandra to A Raja, the then- telecom minister.) Unitech Wireless has 36 million customers—more than all the other newcomers put together. The company had got licenses for all the 21 telecom circles in the country, but hasn’t got spectrum in the most lucrative of all, Delhi. Though it has launched in all 20, in order to meet its rollout obligations, Unitech Wireless has focused on 13 circles. In these circles, its share of subscribers is 5 per cent and share of revenues is 2.7 per cent. But, the company claims, its share of incremental customers was about 15 per cent and incremental revenue was 15 per cent in 2011. And, Unitech Wireless Managing Director Sigwe Brekke says, EBITDA (earnings before interest, tax, depreciation and amortisation) breakeven will happen by 2013, as was planned originally.
Unitech Wireless’s average revenue per user of Rs 100 per month is way below the Rs 200 to Rs 250, it had projected in 2009. But the assumptions on usage (300 to 350 minutes per person per month) and net customer accretion (7 to 8 million per month) have been more or less on target. Brekke doesn’t disclose the profit or loss in operations, but gives an idea where Unitech Wireless stands: “For us, the cost ought to come down to the industry average which is 35 to 40 paisa. The revenue is still lower; we need to get it up 20 to 25 per cent.” The recent move by all telecom companies to raise tariffs must have helped, and Brekke would hope that there would be more such increases in the days to come.
Unitech Wireless has curtailed its capital expenditure plan. In the original plan, much of the Rs 15,000-crore investment was front-loaded—it was to be made in the first two years. Now, it is being spaced out over more years. Rivals also question Unitech Wireless’s strategy to target its service at the bottom of the market. It only offers voice and SMS, forget value-added and 3G services, or even post-paid connections. And its prices are rock bottom. “With basic tariffs at rock bottom, in this crowded market the only way to make money is value-added services,” says a Delhi-headquartered rival. “The market has evolved.”
Brekke argues that value-added services account for only 10 per cent of the market. And he has no qualms at Uninor being a barebones brand—its customers include migrant workers and teenagers. “If you are a postpaid, 3G or data customer, forget us,” he says. This helps. While most telecom companies spend 6 to 7 per cent of their revenue on advertising, Unitech Wireless spends only around 3 per cent. Since it’s mass market, it does not advertise on the electronic media (it is expensive) or national publications (it is not consumed by its potential customers).
Instead, it buys space on local media and advertises heavily at the point of sale. Brekke believes that 50 per cent customers walk into the store with an open mind and ask the retailer for a “good” connection. To get the retailer on his side, Brekke offers him three commissions: one when the SIM card is sold, two when he achieves a certain volume, and three when the customer hits a pre-defined ARPU. The third, he claims, is not offered by anybody else, and is therefore extra incentive that the retailer gets from Unitech Wireless. This is an innovation Brekke imported from Telenor’s operations in Bangladesh. All told, Unitech Wireless has 370,000 retailers. Seven thousand salesmen, contracted from manpower aggregators but dressed in the Unitech Wireless uniform, visit all large dealers every day. “It has a reasonable presence at the bottom of the pyramid,” says Ernst & Young Senior Partner Amit Sachdeva. “It has been innovative in sales and distribution.”
Unitech Wireless was amongst the last buyers of 2G equipment. It got all the five equipment makers vendors—ZTE, Huawei, Ericsson, Nokia-Siemens and Alcatel-Lucent—to compete for the order. “Their 2G investments at the end of their lives—almost all the fixed costs had been taken out, and they had to worry only about the variable costs. This got our prices down by close to 20 per cent,” says Brekke. “Our IT contract with Wipro also came out 10 per cent cheaper than expected.” With newer equipment, Brekke claims Unitech Wireless can push through 50 per cent more traffic than others.
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Instead of spreading itself thin, Unitech Wireless has decided to focus on large towns and cities in each circle. That’s because these towns are highly penetrated, but 10 per cent customers change their service provider every month. “This means they are not happy with their service provider, which is a great opportunity for a newcomer like us,” says Brekke. “This enable us to expand one step at a time; we don’t have to be everywhere on day one.” Even otherwise, Brekke feels the market is under-penetrated, which leaves a huge upside for Unitech Wireless. “We estimate that only about 45 per cent of the population has a mobile phone. The rest is mostly duplication. Of the 850 million SIM cards in the country, you have to deduct more than 40 per cent because a lot of people have two SIM cards. Our estimate is that 40 to 50 per cent of the new handsets sold are dual-SIM handsets.”
The issue that needs to be sorted out is money for expansion. Telenor wants Unitech Wireless wants to do a rights issue of Rs 8,000 crore. Unitech insists on debt. Brekke says there is no long-term debt available. Unitech Wireless has raised short term loans of Rs 5,000 to Rs 6,000 crore, guaranteed fully by Telenor, from the international market. But that cannot go on forever. The only option left, Brekke says, is a right issue. Under current rules, Telenor can raise its stake in Unitech Wireless up to 74 per cent and no further. The only way out is if Unitech sells its part of the rights issue to a third partner.
In spite of the 2G controversy, Brekke says, none of the top 100 people of the company left. “I tell my people to focus on operations and let me take care of all the questions that are raised,” he says. Meanwhile, Brekke claims, 10 to 15 people from India have been sent to work for Telenor in Thailand and Malaysia. Is that because they have cracked the toughest mobile telephony market in the world? Brekke seems to think so.